By Due. Originally published at ValueWalk.
We financial millennials have the punchline for Boomers for way too long. But, guess what? When it comes to saving money? We’re on fire.
According to a study by Charles Schwab, millennials save significantly more for retirement than Baby Boomers. Unlike their parents, this younger generation has started saving money as early as their mid-20s. In addition, millennials ranked higher than Generation X-ers on the Retirement Preparedness Scale largely due to an increase in their savings rate from 7.5% to 9.7% in the past two years.
Their 401(k) balances are also higher than those of Gen Xers, according to a report released last year by Pew Research Center.
There may be some who are surprised by this. To us, it’s nothing new.
Despite the misconceptions and stereotypes, like wasting money on avocado toast, millennials are, in fact, savers.
Millennials’ Savings Habits
“Because of the expensive necessities that surround us, some say millennials aren’t savers,” Matt Rowe wrote in a previous Due article. “However, even though they may perceive us in a certain way, we are savers and work towards saving more and more.”
In short, millennials are savers. But, what do millennials do to save?
We over save and invest.
“One common trend among millennials is that we over save,” adds Matt. We recognize that there will be costly investments in the future, so we should start saving now in order to prepare for them. In order to ensure that we save every week, every month, and every year, we will develop habits and think things through, he says.
But, we’re not just saves. We’re over saves.
Basically, we purchase the essentials and a bit of what we want, then save the rest. Today, you will find more young people talking about stocks, annuity companies, 401ks, making money online or other investment ideas. If we over-save, we can weather any financial storm.
Even better? Once we have financial security, we can get a little riskier with our investments.
We set financial goals.
“A key aspect of over saving and investing is setting financial goals,” Matt states.
This may mean securing a job that pays a certain amount, saving a certain amount each week, or investing a certain amount each month. Our generation sets goals, and we’re savers because we know how to set them and make plans to reach them.
Furthermore, we create a budget, accumulate an emergency fund, and pay off our debts following a basic process. It’s not easy. But, we it’s essential if we want to avoid additional debt and live comfortably in retirement.
Also, we have a knack from learning from our past financial mistakes. And, if we need help setting goals, we reach out to mentors for assistance.
We know how to get deals.
The millennial generation knows how to get great deals and save money on everyday products because they grew up in the .com era and Internet explosion. Shoppers often begin by browsing a clearance rack or a tab on a website before making a purchase. Our first step when buying online is to perform a quick Google search to see if discounts are available.
In fact, according to the 2019 Millennial Shopping Report, “95% of Millennials search for coupons on the Internet before making an online purchase and report spending more time searching for savings than in prior years.”
“Millennials have officially grown up, and so have their shopping and spending habits,” says Marc Mezzacca, CEO of CouponFollow. “As Millennials move towards a fully digital shopping experience, online retailers—like Amazon—have a tremendous opportunity to further increase their market share by prioritizing speed, convenience, and savings across each touchpoint of the consumer journey.”
But, it’s just not about finding the best deals. We also save monthly by joining loyalty programs, taking advantage of student discounts, and buying in bulk. Additionally, we have thrifty spending habits and can delay gratification. And, we use apps like Truebill or Trim to manage subscriptions, lower monthly bills, and make the most of our spending.
We understand why we spend.
While millennials can benefit from saving, understanding the rationale behind a purchase allows them to make smarter choices. When we see an expensive purchase, we think to ourselves, “is it really worth it?”” “In many cases, it is worth it or we don’t have many other options,” explains Matt.
To avoid missing out on social events and to fit in with our peers, we spend money to cover our necessities. We like to be social, but we are aware of the cost involved. For example, if we dropped over $100 on sneakers just to fit in, that might prevent us from going to a concert.
We can better understand the value of a dollar as long as we know why the purchases were made. We don’t buy a lot of things because they are not worth our money. The millennial generation saves because they know the value of a dollar and understand the reasoning behind our spending habits.
It’s Not All Sunshine and Rainbows for Millenials
The National Institute on Retirement Security reports that 72% of Millennials are significantly pessimistic about achieving financial security in retirement, compared with 43% of Boomers. And, saving at a younger age has not eased retirement anxiety.
Millennials are more financially struggling than previous generations. After all, when we reached our peak earning potential, we began to deal with the Great Recession and Covid. We’re are now preparing for yet another recession, coupled with inflation levels unseen in 40 years. As result millennials are dealing with longer-stretches of joblessness.
But, that’s not all.
A report published by the Organization for Economic Cooperation and Development (OECD) notes that the middle class is on the verge of disappearing. By comparison, 60 percent of millennials consider themselves middle-class, versus 70 percent of Baby Boomers.
We’re also buried under debt — mainly student loan debt. Moreover, 35% of workers over the age of 22 don’t work for firms with defined benefit plans or defined contribution plans.
Are Millennials Saving Enough?
“I wouldn’t say I’m savvy with it, but I try to be conscientious that I am putting away enough money,” Michelle Wisnieski told Pew. “My dad always told me not to rely on Social Security; you have to invest for yourself. My dad has a pension, and he’s, like, ‘you’re not going to get that.’”
At the time, she earned $50,000 and put 4 percent of her earnings into her work’s 401(k). She also gets an additional 4 percent match from her employer. Although she has substantial college debt, which she is also honoring at a regular pace, she has disciplined herself to do this.
Despite most millennials following suit, that doesn’t mean that their hard work and discipline will pay off.
The Federal Reserve’s most recent Consumer Finance Survey for 2019 shows that Americans have $65,000 in retirement savings. A nest egg of that size will not be able to provide you with an enjoyable retirement.
And, it applies to all Americans regardless of age.
The median amount of retirement savings held by Americans 55 to 64 years of age was $134,000. While not enough for ensuring a long and happy retirement, it’s still higher than the national average. On the other hand, Americans under 35 have just $13,000 in savings. The good news is that they do have time to catch-up.
“Approximately half of Americans are at risk of not being able to maintain their pre-retirement standard of living after they stop working,” said Angie Chen, a research economist at the Center for Retirement Research at Boston College.
Many factors can influence retirement planning — such as long-term inflation rates, market returns, and life expectancy. Even so, there are many calculations to make and assets to accumulate in order to have a comfortable retirement.
How Much Should You Save for Retirement?
When saving for retirement, most experts recommend an annual retirement savings goal of 10% to 15% of your pre-tax income. High earners generally want to hit the top of that range; low earners can typically hover closer to the bottom since Social Security may replace more of their income.
But there is no singular formula for figuring out how much you should save for retirement. More than likely, it will depend on your future, both the known and unknown parts, such as:
- Life expectancy
- Current spending and saving levels
- Retirement lifestyle preferences
Here are four steps to figure out how much you should save for retirement.
Calculate your income needs for the future.
“Having a percentage or dollar amount to give you a rough idea for planning can be helpful, but you can’t be focused solely on that,” said Ben Storey, director of Retirement Research & Insights at Bank of America. “Everybody’s lifestyle is different. What they want to do in their retirement years may be very different as well.”
To avoid relying on a generic figure, he suggests estimating what you will live on after retirement using what you live on now and what you might change after you retire. But, to give you an idea on how much you’ll spend, the Bureau of Labor Statistics data, states that “older households” typically spend $45,756 per year, or roughly $3,800 per month. FYI, “older households” are defined as those run by someone 65 and older
The following are the average retirement spending amounts:
- Housing: $1,322
- Transportation: $567
- Health care: $499
- Health care: $499
- Personal Insurance / Pensions: $237
- Charitable Donations In Retirement: $202
- Entertainment: $197
Of course, this will vary from person to person. But, for a more personalized calculation, you’ll want to jot down your current spending. Next, determine which of these expenses will increase or decrease.
Researchers, for example “have found that once people retire they spend more time shopping carefully and preparing meals at home, for example. Their cost of living for items such as these goes down,” Storey says.
Apply a few rules of thumb.
In the 2021 Employee Benefit Research Institute’s retirement confidence survey, 7 in 10 workers say they’re sure they’ll have enough money to maintain their lifestyle in retirement. But 1 in 3 say the COVID-19 pandemic hurt their retirement savings. This demonstrates how a job loss or other financial burden may make you have to adjust your retirement plan.
And, to accomplish that, here are some pointers to keep in mind.
One of the rules used most often is the 80% rule. For those unfamiliar, this simply suggests you’ll need to replace 80% of your preretirement income. However, there is no hard and fast rule here. Some experts advise to aim for about 70%, while others suggest 90%.
Want to calculate where you stand? Look at what percentage of your income you’re saving. When you cross the hypothetical finish line, you won’t have to do that anymore. So, for instance, if you’re currently saving 15% of your income, you can easily live on 85% of your income without modifying your expenses. Please don’t forget to add in Social Security and cut payroll taxes — which are typically 7.65% of your earnings. This could possibly reduce your income even more.
Using a rule of thumb like this is best used as a comparison tool to take a deeper look into your expenses as a more tailored approach.
Use a retirement calculator.
By combining your spending estimates with projections, a good retirement calculator will provide you with a clear picture of how far you are along in your savings journey.
Generally, with most calculators, certain assumptions are pre-programmed based on research. The default is set for life expectancy, inflation projections, and market returns. As such, you should consider if those assumptions are valid under your situation in order to get the most accurate result.
These calculators are easily accessible online. One of the more lauded options, though is the T. Rowe Price calculator. It is a straightforward tool that simplifies retirement planning. And, you can use it whether you’re just getting started with retirement savings, or you’ve already retired.
Some other noteworthy retirement calculators are:
- MaxiFi Basic Retirement Calculator
- New Retirement Online Tool
- AARP Retirement Income Calculator
- Schwab Retirement Savings Calculator
- Bankrate Retirement Income Calculator
Keep visiting regularly.
Situations change, which means your retirement needs will also change as well. Examples, would be landing a new job, having a baby, or picking up a new hobby like pickleball. As such, you’ll need to review your retirement calculations.
In short, to keep up with the times, it’s always best to make adjustments along the way. It’s much more convenient than trying to catch up later.
If you need assistance with balancing your financial goals, you can get help easily. For instance, robo-advisors offer a variety of services and are available online at low fees. But, there are also financial advisors who will work with you in order to reach your long-term goals.
Do You Need to Adjust Your Retirement Saving Plan?
To make sure you reach your retirement goal, once you know whether you’re behind schedule, on track, or ahead, here’s what you need to do:
Take action if you are behind. However, don’t panic.
- Save more money now. Your money has a longer period of time to potentially grow through compounding if you start saving early. You should increase your annual contributions and ask your employer if they offer a matching contribution.
- Reevaluate your goals. Would you be able to live on less? Remember, as a retiree, you may not have to pay a mortgage or commute.
- Keep your options open. You may not need to tap your portfolio for income right away if you work a few more years or work part-time in retirement. Furthermore, delaying Social Security may boost your benefits after reaching full retirement age by up to 8%.
As long as you stay on track, keep it up. But, rebalance your portfolio frequently and continue making contributions.
- Max out your retirement accounts. In 2022, anyone 50 or older can contribute up to $27,000 to a 401(k) and $7,000 to an Individual Retirement Account. Individuals under 50 can contribute a maximum of $20,500 and $6,000, respectively.
- Don’t give up on stocks. You should be more cautious as you near retirement, but not too cautious. It is advisable to remain exposed to stocks at least to some degree in order to capture market growth without losing sleep in case the market turns sour.
Congratulations if you’re ahead! Maintain a steady pace and stay focused.
- Don’t stop saving. In life, or in the market, you never know what may happen. So, keep on tricking just to play it safe.
- Consider re-examining your assumptions. Is early retirement on your agenda? Is your retirement spending going to increase? Would you consider supplementing your savings with Social Security or a pension in retirement? Be sure your retirement plans align with your savings.
Frequently Asked Questions
How much of my income should I put towards savings?
Generally, people should try to save at least 20% of their income. Using the 50/30/20 rule of thumb, you should aim to achieve this once you’ve paid off your debts.
What amount of savings should you have?
Age plays a pivotal role here. For example, you’re unlikely to be able to save as much money if you have just graduated college. Furthermore, the amount of money you can live on while still maintaining your standard of living matters. It’s hard for people to break expensive habits after they become rich because they often develop expensive habits as well, even if they lose their wealth.
- You should have saved one year’s salary at the age of 30.
- It is recommended that you save between 2x and 3x your current salary when you are 40.
- At age 50, you should have a salary equal to 5x-7x your current income.
- When you reach the retirement age of 67, when your 401k or retirement account can be withdrawn without tax penalties, you should have saved at least 10x to 11x of your annual salary.
How can you start saving more money today?
An easy way to get started with saving is to have direct deposit. With direct deposit, your paycheck goes straight into your savings account.
If you are offered a 401k plan through your employer, make sure you enroll as soon as possible. For retirement savings, both time and compound interest are your friends. Don’t wait until tomorrow to contribute because you won’t be able to.
Where should I save money?
It is best to keep emergency savings in a regular savings account. If you don’t have such an account, make sure that you find one that is insured and certified by the FDIC.
Consider a high-yield savings account if you are saving for a major purchase or expense. The interest rates are higher than those of a regular savings account, but different conditions and restrictions might apply, such as a minimum balance and deposit amount.
What’s the difference between saving and investing?
In spite of high-yield savings accounts earning you interest, investing will bring you better returns. Any surplus savings you have after you have saved up an emergency fund can be invested.
Investments typically earn a greater return than savings accounts. For inexperienced investors, low-cost index funds are recommended since they are relatively safe and have long-term benefits. Although you’ll go through ups and downs, you’ll end up with a bigger profit than you started with.
Article by John Rampton, Due
About the Author
John Rampton is an entrepreneur and connector. When he was 23 years old while attending the University of Utah he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months he had several surgeries, stem cell injections and learned how to walk again. During this time he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine, Finance Expert by Time and Annuity Expert by Nasdaq. He is the Founder and CEO of Due.
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